4 ways to maximize your mortgage refinance savings

Congratulations! You’ve taken advantage of record-low interest rates and refinanced your mortgage. By now, you’re likely seeing a boost to your personal finances in the form of extra savings each month. But consumers should skip the spending spree and instead focus on how to make those extra pennies work both smarter and harder.

In case you are wondering if it's worth the hassle of going through the mortgage refinancing process, the benefits far outweigh any disadvantages. Not only does refinancing typically lower your monthly payment, but you can also refinance your loan into a shorter loan term (if you so desire), and build equity faster.

4 money moves to make with your refinance savings

Once you’ve secured the lower rate and closed on your refinance loan, here is what to do with the extra money you’ve just recouped.

1. Pay off your mortgage quicker
2. Pay off other debt
3. Contribute to retirement
4. Build up emergency savings

If you haven't yet refinanced your mortgage, then you should compare rates and get started on the application process now. Don't leave money on the table! Fill out some online forms and see how much you could save today.

1. Pay off your mortgage quicker

If you are “team pay as little in interest” as possible, it’s best to leverage your mortgage refinance savings to pay down the mortgage as quickly as possible.

To illustrate this, for someone who realized $300 in monthly savings, putting this extra amount toward a $300,000 mortgage at 3% interest each month will shave 8 years and 2 months off of a 30-year loan.

Even if you prefer to keep the extra money in the budget on a monthly basis, even one extra payment per year can significantly shorten your mortgage payoff time. Contributing $1200 extra dollars a year will shave three years off the payoff timeline and save $20,000 in interest over the life of the loan.

PROS AND CONS OF PAYING OFF YOUR MORTGAGE EARLY

2. Pay off other debt

If you have high-interest debt, other revolving debt, or debt from student loans, the extra savings from the mortgage refinance should be allocated to reducing your overall debt burden. After all, the less you owe and the faster you pay it off, the less you’ll pay in interest over time.

Let’s say a homeowner realizes $200 in extra savings from a mortgage refinance but has $17,000 in credit card debt. By adding $200 on top of the minimum payments, this homeowner could pay off all their credit card debt in about six years. Without the additional payments, it would take over ten years to pay off this amount.

HOW TO PAY OFF DEBT FAST

3. Contribute to retirement

In the thick of the COVID-19 pandemic, it can be hard to imagine the distant future or even the next few months. Eventually, though, the pandemic will pass, and you’ll still need income to live off of in retirement.

Using a compound interest calculator, even if you’ve contributed zero dollars in your 20s and 30s, $250 in mortgage refinance savings contributed monthly at 7% averaged annualized returns in your retirement accounts will yield $284,000 30 years from now.

The lesson? It is never too late to start, particularly when it comes to something as expensive as funding years in retirement.

4. Build up emergency savings

If the pandemic has taught Americans one thing, it is to expect the unexpected.

As COVID-19 numbers continue to rise nearly nine months later, it is never a bad idea to pad the savings account. Here are just a handful of “just in case” scenarios to save for:

• At least a year’s worth of living expenses.
• One percent of your home’s total value for repairs and yearly maintenance.
• The amount of your health insurance deductible (so you don’t have to financially sweat a major medical emergency.)
• An emergency fund for any family pet.

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